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Question:
My client has an ISO grant that expires this year. Her options are
currently “in the money.” She would like to exercise all the options
in this grant in order to avoid letting them expire. However, she
doesn’t have enough money to cover the exercise price and resulting
taxes, and doesn’t want to take out a margin loan to cover those
costs. As a result, she needs to make a disqualifying disposition
to cover the cost of the exercise.
How
can I use StockOpter® to calculate the exact number of ISOs that
she must disqualify to cover costs so that she can hold the remaining
number and sell them later as qualified?
Answer:
Disqualifying ISOs to cover is a two-part
process. First, type a formula in the row “Qualified
options to exercise” to calculate the
number of shares to exercise and hold. Then, use the Goal Seek
tool to calculate the number of shares to sell as a disqualifying
disposition.
Step-by-step
instructions in StockOpter® Pro
Part
I - Identify Shares to Exercise
To
identify the number of shares to exercise, create an Excel formula
that calculates the number of qualified options to exercise.
In
column C on the row
“# of qualified options to exercise,” type
= C11-C14.
Note:
This assumes that you want to exercise
all the available options, have only one ISO, and are doing this
calculation for the first year.
Part
II - Calculate Number of Shares to Sell as a Disqualifying Disposition
Use
“Goal Seek” to
calculate the number of ISOs to disqualify in order to have enough
cash to buy the stock and pay taxes on the sale.
Tip:
Open the “Bottom Lines Window”
to see the row “Total after tax cash
flow from all stock option activity.”
To do this, on the “SO Views”
menu click Bottom Lines Window.
-
On the “SO Tools” menu click “Goal
Seek.” The “Goal Seek” box displays.
- In
the row “Total after tax cash flow from all
stock option activity,” click to select the cell that corresponds
to the year in which you want to sell the options. The cell location
displays in the “Set cell” box.
- In
the “To value” box type the numeral “0”.
- Click
the “By changing” box and select the corresponding
cell in the row “Disqualifying disposition.”
- Click
OK. Goal Seek calculates the answer and displays it in cells
C13 and C14.
- Round
the number in the row “Disqualifying disposition”
up to the next whole number.
In
the “Bottom Lines Window,” the row “Total after
tax cash flow from all stock option activity” should be a number
equal to or greater than zero.
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